“She’s baaaaaaaaaaaaaaaaack…”

Yes, I’m back from my hiatus! So what have I been doing?
I’ve been attending seminars, webinars, and cornering strange people on the street (who will probably claim that I was the strange one!), to find out exactly what they’d like from a money blog.
You see, I’d had some pretty good feedback, but I wanted to be sure I was delivering something people really wanted. Maybe even needed.

So I hit the suburban streets, and discovered the top 10 “wish list” items for a money blog.
- easy to understand with no jargon (or jargon explained);
- to be kept up-to-date with current finance issues without having to watch the business channel or read
  the Financial Review;
- not boring;
- practical ideas;
- personal information (eg. what I do with my money);
- financial tips/ tricks of the trade;
- savings strategies;
- how to deal with a range of financial services (eg. banks, financial planners, lawyers, mortgage brokers,
   real estate agents etc);
- real life examples;
- access to me personally, as well as through blog posts.


The great news is, I can do all that!

You may notice that I’ve given the page a bit of a facelift. A couple of clients commented that they felt some consistency with my company branding might be a sensible idea (thank you), so I’ve hauled in the red, white, and blue.

I also shortened the name to simply “Money Matters” to make it easier for people to remember, and to find it through a search engine.

Finally, you can also view the blog via our website www.hendrie.com.au. While you’re there, you might find some other information of interest.

Ok, so what do you want? If you have any ideas for my blog, including topics you’d like covered, please don’t hesitate to add a comment.

Or if you’d prefer to contact me personally, you can email me anytime at askCaren@hendrie.com.au.

Talk soon,
C

If you would like to receive notification when I post a blog, just email your details to askCaren@hendrie.com.au.

Compound interest

After 16 years in financial planning there are terms and concepts that I just take for granted, but on my first day on the job somebody even had to tell me what was meant by “equities”. Pity the person that had to enlighten me on the topic of dividend imputation :). So what’s the point of this particular ramble? Only that a friend of mine asked me recently to explain the principle of compounding, and I realised that sometimes we financial planners assume that everyone knows what we’re talking about!

For those of us that like to maximise our investment returns, compounding is actually very important. Sometimes it’s the small things that can make a big difference.

When you earn income from an investment you have two choices – you can either have the income paid out to your bank account, or you often have the option to re-invest the amount back into your investment. The investment could be shares, a managed fund, or a Term Deposit, and the type of income could be dividends or interest.
Compounding works when you re-invest the income instead of having it paid out to your bank account. If you continue to do this over a few years, you'll be earning interest on your interest on your interest, which results in a better return than paying out the interest and dividends to a bank account.
Let’s take a really easy example of an investment of $100,000 earning 10% per annum for three years.



Scenario 1 – income is paid out at the end of each year:

Initial investment - $100,000

End of year 1 - $10,000 is paid to your bank account;

End of year 2 – You still have your original $100,000 invested so you receive another $10,000 income;

End of year 3 – Again, you have your original $100,000 invested, so your receive another $10,000 income;

At the end of three years you’ve earned $30,000 interest on your original $100,000 giving you a total of $130,000.



Scenario 2 – income reinvested and compounded

Initial investment - $100,000

Year 1 - $10,000 is re-invested, so that you now have an investment of $110,000;

Year 2 – Income of 10% on $110,000 is $11,000 which is re-invested so that you now have an investment of $121,000;

Year 3 – Income of 10% on $121,00 is $12,100 which is reinvested to give you a total of $133,100.

So after 3 years you’re more than $3,000 better off simply by compounding your interest each year instead of having the money paid out to you.
And that folks, is compounding, pure and simple.

Talk soon,

C xx

BURBS BREAKDOWN: A new year, a new PM, and a new look resource tax...

First of all, Happy New Year!! I know that may make me sound nerdy, but hey when you live and breathe finance, it’s a big deal.

Speaking of big deals – what a week! Since my last posting we’ve sworn in a new Prime Minister, welcomed in a new financial year, and witnessed a backflip on the resource tax.

My tip for the day – expect an election announcement within the next few days. Timing couldn’t be better for Labour. I have some fairly strong opinions about what has happened over the past week, but this is a money blog, not a political platform. However, whether you agree with what Labour has done or not, you have to give them credit for being shrewd.

Anyway, let’s get back to the resource tax because it is THE hot topic of the moment. With all the hype and noise, I thought it was time to bring it down to proverbial “brass tacks”.

It’s really as simple as this – following the GFC, the government have been desperately seeking ways to get the country back into the black. As well they should! When things were just starting to get nasty back in 2007, I told my clients that the Libs had left us a fairly substantial war chest, and therefore I was fairly confident Australia would be able to “export its way out of a recession”. Guess what; I was right.

Here we have an industry that continued to boom throughout one of the worst financial crises we’ve ever experienced, so frankly, it was an easy target. Furthermore, it kinda makes sense. After all, Australian resources belong to the Australian people, not the mining companies.

You’ll recall from my Henry Report posting in May, that the Government announced it would introduce a “Resource Super Profit Tax” of 40% from 1 July 2012, on profits made from exploitation of non-renewable resources. Basically this tax would apply to any profits over and above 5%, and when you consider the types of profits the bigger mining companies are making, that’s potentially a whole lotta moulah! In fact it was expected to raise $9-12 billion in additional tax revenue for the Government.

I think we all know how well it went over with the mining industry, and the public in general… Personally, I believe Kevin Rudd lost his job primarily because of this very reason. With three debacles already under their belt (emissions trading, insulation, school building…) Labour couldn’t afford to risk the election over the resource tax.

And pronto, we have a new PM – a female at that – and a very quick resource tax backflip announced today. Not quite a back down, but a decent flip. The tax will be reduced to 30% and will be on profits over and above 12%. Furthermore, it will be renamed the “Mineral Resource Rent Tax”, and be limited to mined iron ore and coal.

So that’s the breakdown. Obviously it’s a lot more complex that that, so if you want to know more just send an email to askcaren@hendrie.com.au and I’ll shoot you a copy of the BHP, Rio, and Xstrata press release which is very comprehensive.

Talk soon,
C
PS. 10 points for anyone that can guess the very vague movie reference I’ve hidden in this week’s blog.

Aussie Shares vs International

I loved the comment that was left after my last posting (thanks anonymous :) ) because there's no easy answer and I love a challenge! The question was “if I was to start investing, how would I go about that? Am I best off investing in Australian shares or looking to countries that are currently struggling?”

So while I was cooking dinner last night (Braised Pork Spare Ribs from Masterchef http://www.masterchef.com.au/braised-pork-spare-ribs.htm – yummo!) and watching The Tudors, I had a bit of a think about the best way to answer this question.
Firstly, I am a HUGE fan of Aussie shares. We have some fantastic listed companies in this country, with some amazing minds running the businesses. Domestic direct shares are a major part of my portfolio, and quite a passion for my Accountant partner, Mick. All that said, there are a number of important issues to take into consideration:

- there are great companies, BUT there are also some pretty crappy ones; you need to be able to spot the difference;
- the Australian sharemarket is VERY restricted, we don’t have much in the way of sector diversification.
When it comes to managing the risk of your portfolio, diversification is absolutely critical;
- Australia only represents about 2%-3% of world sharemarkets, so again, a real diversification concern.

In support of international shares, you only have to look around your own home to see some of the big brand companies that jump straight out at you – check out your television, your oven, your computer, your razor, your hairdryer, your stereo… There are some AWESOME investment opportunities available. But again, there are some issues to take into consideration:

- if we’re talking about “countries that are currently struggling” then the first question that pops to my mind is why are they struggling? If it’s because of high debt levels, then I’d be wanting to know a lot about the measures that are being taken to reduce the debt and how quickly it can be done;
- There’s a key difference between companies or countries that are struggling, and those that are under-valued. If they are struggling because of poor management, high debt levels, inefficiencies etc, then you’d probably want to steer clear of them. If it’s a case of the market simply not recognising their value because of the current environment then, they may be worth a good look for future performance potential.
- it can be quite difficult to physically buy and sell international shares directly. In most cases, I personally look to expert fund managers for my overseas exposure.

If you can be bothered, and you have a spare hour, you could check out a webcast by Hamish Douglas Chief Executive Officer and Portfolio Manager for Magellan Financial Group. They have an award winning international fund, and an investment philosophy that I really like. Hamish (a smart guy and entertaining speaker) gives his views on the European Sovereign Debt Crisis, the outlook for the US and an impending slowdown in China so might be worth a peek http://webcast.viostream.com/Default.aspx?viocast=2616&auth=598de6f8-06d8-4b7d-a7a4-b6e8fccff639  By the way, that’s definitely not a recommendation to invest in Magellan, but I like to be able to pass on information that you may not have access to otherwise.

So what the answer to the question in the end? After all that, it’s fairly easy:

1. I believe that both Australian and International shares have a place in a well diversified portfolio.
2. If a company or country is struggling, make sure you know why before you invest. Just because the price is low doesn’t automatically make it a sensible investment – it might be a dog. The basic fundamentals need to be strong to be well-placed for recovery;
3. Always, always, always, get quality, personal, professional advice. I just can’t stress that enough. There’s no one-size-fits-all solution for everybody (even though some institutions that will remain nameless seem to provide advice as if this is the case), and you need to be sure you understand how a strategy might meet your objectives, the risks involved, and the commitment you’re making (if I’m geographically convenient and you want to get in touch with me personally, you can email me at askcaren@hendrie.com.au, otherwise go to http://www.fpa.asn.au/fpa_content.aspx?doc_id=9114  for someone in your area).

Talk soon,
C

Like sands through the hourglass, so are the days of our Europe...

The market’s been very volatile lately, partly due to employment data coming out of the US, but largely, it comes back, yet again, to my “rumours” theory.

So, let’s go back to the protagonist of our ongoing soap opera – Europe, and this time it’s Hungary causing trouble. Now Hungary have a government that hasn’t been in place for very long and during their election campaign, they made certain tax cut promises.

Recently they came out and said that unfortunately the debt situation was more difficult than they had initially thought, and that they wouldn’t be able to follow through on a lot of these promises. I can hear everyone gasping with shock over the thought of a government reneging on a promise, but yes, it happened.

The result was that it sent people into a bit of a panic, as it was interpreted by many that Hungary was in serious trouble.

In reality, the Hungarian government was probably being quite responsible by deciding that it was a time to tighten the belt rather than cut taxes, but let’s be real, I don’t think it’s a stretch to suspect that they may have used the situation to wriggle out of some tax cuts.

So the situation is not as bad as people thought, and the International Monetary Fund (IMF) have come out and confirmed that they do not have concerns regarding Hungary’s debt levels, but the damage was done at least for the short-term.

So where's the upside? The upside is exactly where it has been for the 16 years I’ve been financial advising – the best time to invest is when share prices are low.

That may sound like common sense, but the fact is that most people do the exact opposite – buy high and sell low.

The Australian All Ordinaries index keeps currently hovering around 4,500 points, but it reached over 6,800 points in 2007. Historically the sharemarket has always returned to a higher point than it’s previous record. Now I don’t advocate actively trying to time the market (no one can do that), BUT, if an opportunity is staring you in the face, it’s probably worth at least exploring.

Talk soon,
C

Gracious in defeat...?

I was chatting away on my radio program one Thursday morning, and happened to mention an ongoing feud between Mick and I, over whether I would change my surname when we (eventually) got married. Those who know Mick will understand why I’d rather keep my much simpler name… Anyway, this sparked one of the other dj’s to initiate an impromptu telephone poll so that listeners could phone in with their votes.

The result was 85% in Mick’s favour…. HMPH!!!!

So I guess I shouldn’t be surprised that Mick is again resoundingly victorious in our suing the banks debate. Thanks to everyone that voted, and to those that phoned in their vote. A special thanks to Shirley for being the only person to support me other than my dad. I should also give a mention to the extraordinary diplomacy of my faithful assistant Kathryn who decided to go the way of the Swiss….

As such, I graciously admit defeat (grumble, grumble, grumble).

The one point that everyone agreed upon regardless of their position on the class action, was that the bank fees were extremely unreasonable. So if nothing else, at least that’s being addressed, and we’ll see what happens with the court case.

Glad I could get ya thinking!

Talk soon,
C

PS. Steve, you obviously miss the “white line fever”!!

So we're suing the banks. Where to next?

Sooooooooo, the latest big news in the Aussie finance world is the class action against the banks, on behalf of “ordinary Australian” customers who have been “gouged” by “excessive” and “unconscionable” fees imposed by the banks - when those customers breach their banking contracts.

And customers have been signing up to the “no win-no pay” case in droves. At one stage last week it was more than 1,000 per hour.

I told you that this had sparked a heated battle between myself and my Accountant partner Mick (yes an Accountant and Financial Adviser together – such an exciting couple). So I wrote down my take on the situation, and sent it to Mick for his “right of reply”. Below is the full and unabridged version :) Please let me know who you think the winner is!

Caren says: I wonder if bank shareholders – many other “ordinary Australians” – will be happy if the case gets up and their dividends are slashed? And have any of them been caught up in the hype and signed up to the class action without fully understanding the consequences?

Mick says: I’m sure many “ordinary Australians” have indeed been caught up in the hype, perhaps without thought to the impact on dividends… But in many cases I believe it’s simply a case of “why not?” IMF are funding the court case, so it doesn’t cost anything to participate. From a personally selfish perspective they may even get a win from the case and we may still get our dividends, albeit potentially lower dividends…. I’m not convinced the dividend will be too much lower given that the amount they are asking represents around 2% of one year’s earning….

Caren says: The basis of the case seems to be a Queen’s Counsel opinion that because the actual cost of dealing with the breach of contract is much lower than the fee charged, then the banks had no contractual right to impose the fees. This is despite the fact that the customer overdrew their account, wrote cheques that bounced, paid their bill after the due date etc. I’m not sure any of us can claim that we didn’t realise we’d get penalized for these actions.

Mick says: Under the terms and conditions of operating an account (the big fat book you get every time you open an account; but no one reads), yes you are agreeing to the fees and charges and part of that includes penalties when you even slightly breach the terms – eg. overdraw your credit card limit or business account.

However, the Australian Securities & Investment Commission (ASIC) the regulatory body that governs these matters determines that the fee or ‘penalty’ must fit the cost for the bank. The argument is that when the banks have set their fees, they have applied an “arbitrary cost” across the board to all customers, regardless of the size of the breach.

So as an example you go over your credit card limit by $5 and receive a $30 penalty. You can’t tell me that the cost to the bank to remedy the over-draw is $30! Especially with technology. That’s the principle of the court case - make the penalty fit the crime… That’s the basis of our court and legal system, and Caren you should know that seeing you’re always throwing legal principles at me to win an argument.

Also seems odd that 6 months or so ago, the fees were voluntary reduced by the banks, with NAB leading the charge. For example to be overdrawn now costs $5 for many banks, not $30 which is more realistic and commensurates with the cost of remedying the breach. How coincidental. Perhaps they had wind that this class action was afoot….

Caren says: Hey, that was way more than your alotted space! I should point out, I’m not arguing against the fact that the banks might be ripping people off with these fees, I’ve certainly copped a few in my time, but it makes you wonder where it could lead. Will lawyers sue on behalf of all plasma buyers who purchased before the price fell? Presumably the manufacturer’s cost was much lower than the retail, even wholesale, price - particularly in the early days. What about blue-ray DVDs?

Mick says: Change in prices is just simply market forces, not a breach of law. It’s Economics 101 - “supply and demand”… There’s no law against making money and the margin will always be what the market will bear. Too much competition will lead to lower margins, and not enough competition will lead to higher prices because of higher seller margins… You can’t outlaw or sue over that… Unless of course you are the government and think a “Resource Super Profits Tax” (RSPT) is a good idea ….

Caren says: Oh, don’t even start me on the resources tax. I think you have some valid “technical” points Mick, but I still think the whole thing is conceptually ridiculous. Instead of suing the banks (who were always completely up-front about their penalties), shouldn’t we be suing ASIC as the regulatory body for not stepping in and putting a stop to the over-charging earlier? It will be interesting to follow and see what happens, and to see whether the case actually gets to court. Of course, I’ll keep you posted.

Talk soon,
C
PS. Happy to take a poll on whose argument you feel is most compelling! Just post your vote in the comments section below and I’ll tally the result.

Dollar Cost Averaging - it's a mouthful, but it's easy and it works!

I get why it’s called “dollar cost averaging”, but really, this very simple investment strategy is quite the mouthful. Mind you, my suggested alternative of “investing a bit at a time to take advantage of all the ups and downs” is a tad wordy.

If you’ve been following my blog (and let’s face it, why wouldn’t you? tee hee), then you’ll know that the major sharemarkets are crazy volatile at the moment. So does that mean you shouldn’t be investing? Not at all, but it does mean that you should look for a strategy that actually takes advantage of the “ups” and “downs”.

This strategy is often referred to as Dollar Cost Averaging because it allows you to average the purchase price of your investment over time.

Rather than trying to pick the right time to invest, you are continually adding to your investment and therefore avoiding the risk of entering the market at the wrong time in the investment cycle. Imagine if you had invested a significant lump sum of money yesterday when the market lost a whopping 3%?

When investing regularly over the longer term it usually doesn't matter if the market fluctuates. In fact, you can benefit from the downward movements by buying investments at a “discount” and this lowers the average cost of your units or shares. For example, if you’d invested in an All Ordinaries index fund yesterday, you would have bought your units at a 3% discount!!

Talk soon,
C

The GFC is funny now...

Watching a Robin Williams special on Foxtel last night (Weapons of Self Destruction), I noted that the GFC has now become appropriate comedy fodder. I guess it’s good to be able see the humour in everything…?

Anyway, there were a couple of observations that did tickle me, so I thought I’d share them with you.

One of my laugh out loud moments was when he reminded us of the banks assuring us that they were "too big to fail", and posed the question – is that like saying you’re "too fat too diet"?!

Then he impersonated a bank authority explaining, “Well we had all these very complex formulas, but we forgot to factor in greed and panic.” Giggle. Yep, it’s funny coz it’s true…

I often tell my clients that if we took the “people factor” out of the market, it would be a much smoother ride. Of course, risk is closely related to reward (and please note I say “risk”, not blatantly silly decisions), so if we eliminated the emotional element from the market we’d also eliminate much of the investment return.

Hey, at least it’s not boring?!

By the way, Williams also apologised for Bicentennial Man which I felt was long overdue.

Talk soon,

C

PS. There’s a serious battle going on in my household at the moment between my Accountant partner and myself. It’s over this whole suing the banks debacle (oops, did I just give my position away?). Maybe I’ll highlight our respective points of view next week if anyone’s interested?

Huh? You wanna to interview li'l ol' me...?

This week Leader Newspapers published an interview with yours truly in their Maroondah edition. I've re-produced it below for non-Maroondah dwellers.

GFC OVER BUT FALLOUT REMAINS

Croydon Financial Planner and local Radio Presenter, Caren Hendrie of The Hendrie Group, was interviewed about the global financial crisis (GFC).

Question: Is the GFC over?

Caren: The worst is behind us, but we’re still experiencing fallout. Many small businesses continue to do it tough, it’s harder to borrow money, and many Australians are still nervous about the share market.

Question: Should we be nervous about the share market?

Caren: If you get good advice, invest in quality, and apply all the usual risk management fundamentals, then there’s actually a fantastic opportunity to invest while prices are still low.

Question: So investors haven’t left their run too late?

Caren: Put it this way, the Australian All Ordinaries Index is currently hovering around 5000 points, but it reached 6873 in 2007. Historically, the share market has always returned to a higher point than its previous record, we just can’t predict “when”.

Question: After more than 10 years in radio, did your program suffer during the GFC?

Caren: Interestingly, it actually increased in popularity. Listeners appreciated someone putting everything in perspective, and in language they could understand.

Question: Any final tips for readers?

Caren: Call The Hendrie Group. We’re offering readers a free financial planning meeting until June 30. Just call us and mention you read this interview in Leader. And of course, tune into You & Your Money on 98.1 Radio Eastern, every Thursday after the 9am news. You can also follow my money blog on http://moneymattersintheburbs.blogspot.com/

The Hendrie Group, 23 Lacey St, Croydon. Phone 9725 2533.

Hendrie Financial Strategies P/L is a corporate authorised representative of Madison Financial Services P/L AFSL No 246679

The Boring Budget ????

“I’m the most boring. No! I’m the most boring…. Seriously, no one is more boring than me…."


Sorry, I was in my own little world, imagining an argument between Wayne Swan and Joe Hockey this morning. If last night’s Federal Budget is anything to go by then, dare I say it, I think we might be in for the dullest election in Australian history.

Budgets during an election year are often a sneak preview of the government’s election platform. Then, you can sometimes glean the opposition’s platform from their response. If both parties are going to play the “economically responsible” card, then this year’s campaign might be an enormous snooze fest. Of course they might surprise us with something unexpected, or a juicy scandal....

Still, perhaps a very clever snooze fest, following a Global Financial Crisis? Getting us “back in the black” within 3 years instead of 6, is a pretty reassuring pledge. By the way, if you’ve just started singing AC/DC’s Back in Black in your head, please pause and re-focus.

Much of the 2010 Budget focussed on confirming proposals from last year’s Budget, as well as the Henry Tax Review. So, for now, let’s just concentrate on the “new” key issues (see my “burbs breakdown” 4 May 2010 for more on the Henry proposals):

Tax discount for savings:

From 1 July 2011 there will be a 50% discount applied to the first $1,000 of interest earned on certain saving facilities (bank deposits, bonds, debentures, annuities).

May I take a moment to say – big whoop! Essentially this means that if you assume a 5% interest rate, you’ll need to have $20,000 in order to take full advantage of the tax saving, and anything over that gets nada. If this is something that the government is serious about then why not make it a lesser tax discount but on all savings? Anyway, that’s my opinion.

Over the long-term, the tax savings within super will probably continue to be the winner, but at least it’s something for short-term savings, and for people worried about waiting until preservation age to access their super.

Permanent reduction to the co-contribution rate

I think most people are aware of the government’s superannuation co-contribution (happy to post a blog on this in the future just in case). You may also recall that at one stage you could receive a co-contribution of up to $1,500, if you made an after-tax contribution to super of $1,000. This represented a guaranteed 150% return.

This had been reduced back to $1,000 (or 100% return), and it looks like it’s going to stay that way. Furthermore, they are not going to increase the qualifying level of income by indexation each year. This is disappointing because the co-contribution rate was supposed to return to 150% by the 2015 financial year.

Simplified tax returns

Question without notice – who thinks superannuation is simple? Coz that’s what Costello promised us back in May 2006, and I’m still waiting. It’s a fantastic tax structure, but simple? Nah.

So here is the Labour government four years later promising us simpler tax returns. In fact, Wayne Swan even went as far as to say that it will give most people “more time with their loved ones.” Tad over the top?

From 1 July 2012, individual taxpayers will have the option of claiming a standard deduction of $500 for work related expenses and the cost of managing their tax affairs. From 1 July 2013, the Government will increase this standard deduction to $1,000. The idea being that it makes it easier to lodge your own tax return. Of course, this is optional, you can still claim your full expenses if you believe they will be higher.

This brings to me to my next question  – do you trust the government with your tax deductions? And please bear in mind we’re talking $1,000 of deductions, not $1,000 refund… You’ll have to forgive the cynic in me, but I can’t help wondering who is likely to most benefit most from this proposal. By making it simpler, are they really hoping that we’ll get lazy and forego our higher tax refund for the easier option? Hmmmmmm.

Again, that’s just my opinion, but I’ve been in this game a while and there are very few free lunches….

Capping the Child Care Rebate

This will most likely be billed as the major Budget “nasty”. Currently the rebate is capped at $7,778 per child and increases each year with indexation. As of 1 July 2010, it will be capped at $7,500 per child (this was the original cap back in 2008) and there will be no indexation for 4 years.

Not sure how I feel about this one. It’s obviously a cost cutting measure to help achieve the three year debt turnaround, but is it counter-productive?

So who got the money?

$5.6 billion to infrastructure;
More than $2 billion to be spent on health;
$1 billion to rail networks;
$661 million to the Skills & Sustainable Growth Strategy;
$652 million to the Renewable Energy Future Fund.

Did you know??

Under our current social security system, widows and widowers that enter into a de facto relationship can still claim the War Widow/ers pension. However, if they get married, the pension ceases. A pretty compelling reason to shack up wouldn’t you agree? He he. Don’t worry, the government are going to remove this little inconsistency. If they are already claiming the pension when they marry or move in together, they will continue to receive it. Nice win.

Heard enough?

This is by no means an exhaustive list of the Budget proposals, but I thought I’d at least share the biggies and try to break them down for you. Remember, at this stage, they are only just “proposals” and there may be changes between now and legislation. I’ll keep you posted of course…..

Talk soon,
C

Are yo-yos "in" again? It would seem, yes....

Anyone who knows me well, will attest to the fact that what I make up for with extreme intelligence and magnificent looks (hey, it’s my blog!), I lack in co-ordination. Hmmm, I have the bruises to prove it as I type.

So when yo-yos were all the rage, I was never able to master anything more than the basic up and down movement – and truth be told, I was pretty proud of that. I couldn’t flick my wrist, make it go sideways, or spin it.

As for walking the dog, well that sounded way too much like exercise to me anyway.

Many years later, I’m feeling like the yo-yo novice again watching the way the market has behaved over the past week. However this time, I don’t want to learn how to walk the dog, I’m more in need of the proverbial “hair of the dog”. Sheesh, what a week!

You’ve already read my “Riots, rumours, and rescues” blog (if you haven’t, see below), therefore I won’t bore you again with an explanation of last week’s sharemarket fiasco. But howsabout the past 24 hours eh????

Our market was up 2.5% yesterday, the US gained 4%, Germany (our villain from last week’s soap opera) and the UK both added over 5%, and Austria, Belgium, and France all gained just under 10%!!

Oh what a night…. do do do do do.

Welcome to the sharemarket folks, enjoy the ride.

The sharemarket is never a smooth ride, even after a large fall like we experienced up to March 2009. When recovering from a bear market, a subsequent bull run will have it’s fair share of “ups and downs”. There will always be weeks and/or even months when the markets will fall, and times when we will experience a significant rally very quickly. There will also be market “breathers” caused by bad news, rumours, and profit taking (I’ve always maintained that no one ever went broke taking a profit).

So you’d like to know what happened yesterday? Ok well, the International Monetary Fund (IMF) and Eurozone (EU) announced a whopping €750 billion bailout plan for Europe (for the record, that’s around $1 trillion folks!). Furthermore, the European Central Bank advised that it would commence purchases in the European bond markets.

So it would seem that Europe is acknowledging how dire the situation is, and have responded in a way that should be able to assist the more financially vulnerable markets over the next few years.

Before we get too excited (thinking maybe I’m the only one excited by all this), the package needs to be approved by the parliaments of the individual member states, and there’s a lot of detail to be worked out.

Of course, the really HUGE news of the night was that my beloved Blues gave the Saints a hiding (sorry dad) in last night’s AFL match. Ah, it really was a great night wasn’t it….?

On a side note, I can’t help wondering how Mr “Fat Fingers” is going right now? You know, the chap that allegedly placed a sell trade for $16 billion instead of $16 million…. Can’t even imagine how red his face was after that little (?) debacle. Tee hee.

Talk soon,
C

PS. I know most Australians will be glued to tonight’s Budget briefing, but if you’re unavoidably otherwise engaged (washing your hair?), stay tuned for my “Budget Breakdown”. I promise it will be concise, easy to understand, and relevant.

PPS. The Australian market closed 1% lower today, so the yo-yo fad continues.

Riots, rumours, and rescues - is this Europe, or an episode of Days of Our Lives?

Act I, Scene i


Setting is Greece 2010. The GFC has hit the country hard, with their budget deficit and public debt, quite frankly, out of control.

Enter the 16-nation euro zone and International Monetary Fund (IMF) offering Greece a much needed bail-out package.

Greece sighs with relief.


Act I, Scene ii


Germany (in a case of blatant typecasting) arrogantly refuses to support the bail-out package unless Greece agrees to implement an “austerity budget” in order to radically reduce their debt. The types of measures to be implemented include pay cuts and tax increases.

Greece knows it will be a tough sell, but impotently accept the conditions, knowing they have no other option.

Act I, Scene iii

Riots break out in Greece in protest against the austere measures, they are extremely violent, and some lives are lost.

Fortunately, as far as the economy is concerned, Greece is not a major character in this drama, in fact it represents less than 3% of GDP in Eurozone.

Act II, Scene i

Setting – Spain 2010.

Like fellow characters Greece, Spain has been hit hard by the recession and they are major protagonists in the economic drama.

Panic starts to build in trading rooms throughout the world, as footage of the Greek riots is shown, and a rumour spreads that Spain has been negotiating a $US364 billion bailout with the IMF.

The Spanish Prime Minister dismisses the rumour as “complete insanity”, and the IMF advise that no such negotiations have taken place.

Act II, Scene ii

Despite the strong denials, world sharemarkets nevertheless react to the riots and rumours. Obviously the reaction is not positive.

Act II, Scene iii

More rumours begin to circulate, and this time it’s Portugal in the firing line. Representing less than 2% of Eurozone’s GDP, Portugal are only rating a cameo appearance, but it’s enough to incite further madness from the crowds.

Act III, scene i

Setting – Australia

Enter Dr Ken Henry (stage left).

Back in Australia, the Henry Tax Review is released (see previous blog entry) and one of the proposals the government decides to adopt, is a 40% “super tax” on the profits of major resource companies.

Even though it’s only a proposal at this stage, Australian mining stocks take a dive as a number of overseas institutional investors dump their stock.

Act III, scene ii

As Europe prepares to set rumours aside for sleep, there is a buzz in the southern hemisphere as Australians wonder aloud whether the government will implement a similar “super tax” on our successful banking sector.
The generator fires up in the rumour mill, and like sands through the hourglass – well you know the rest.

End credits

It’s the opinion of this humble blogger, that these events, while disturbing, are unlikely to have a significant impact on the overall global economic recovery.

And so we close the proverbial curtains on this week’s dramas, knowing that whilst sharemarkets will no doubt be volatile over the coming weeks, we can still have faith in a happy ending.

CURTAIN

The Henry Review – what was it all about, and why was it such a fizzle?

... a "burbs breakdown"

You can only imagine how devastated I was to learn that The Henry Tax Review was being released at the same time I’d be sitting in a movie cinema. What could I do? The tickets were booked and pre-paid; the only way I could mark the occasion was to at least don my brown cardy for the outing.

So there I was, sipping my sauv blanc and watching Ironman 2 (seriously, how does Robert Downey Jr abuse his body with drugs and alcohol for years, and still end up looking like that?) when I received a text message from a colleague telling me that not only were my beloved Blues being smashed by Collingwood, but that The Henry Review was an enormous let-down.

Big sigh of relief (and gulp of wine) from me, as I can assure you that there were a number of nasties in the report I was a little bit worried might be passed. So what's the "burbs breakdown" on the review?

So why the fuss?

For those of you not in the “biz”, last Sunday, Dr Ken Henry (Treasury Secretary), released his long awaited Tax Review comprising a whopping 138 recommendations for tax reform. Accountants and Financial Planners all over the country had been waiting on tenderhooks to take a look at the final report, and to hear the government’s response.

Poor Dr Ken must have felt a tad deflated when he learned the government had decided to only adopt a small handful of the proposals, had rejected about 30 of the proposals outright, and flagged the rest for future consideration.

And the winners are….

- The Superannuation Guarantee Charge (SGC) that employers are required to pay to employees, will increase from 9% to 12%. BUT it will be in increments between now and 2020, so don’t hold your breath.

- As of 2013, SGC will be paid to all employees up to age 75 (currently age 70).

- Individuals earning less than $37,000 pa will be eligible a special super contribution from the government (maximum $500) from 1 July 2012;

- Individuals aged 50+ with super balances of less than $500,000, will be allowed to continue to make concessional super contributions up to $50,000 pa past 30 June 2012. Concessional contributions include SGC, additional employer contributions, and salary sacrifice.

- The company tax rate will reduce from 30% to 28% by the 2014/2015 financial year (2012 for small businesses), and from 1 July 2012, small businesses with less than $2 million turnover will be allowed to write-off expenses for assets worth $5,000 or less (currently it’s $1,000 or less).

The Government will introduce a “Resource Super Profit Tax” of 40% from 1 July 2012 on profits made from exploitation of non-renewable resources. This is expected to raise $9-12 billion in additional tax revenue for the Government from large resource companies. I guess this qualifies as the “biggy”, and it will be interesting to hear how WA responds. Not happy Jan?

To soften the blow, there will be a “resource exploration rebate” set at the company level, for exploration expenditure incurred on or after 1 July 2011.

The Wrap Up

To be honest - much ado about nothing. The few proposals that have made it through so far are largely positive (unless you’re a large resources company), but really don’t make a huge impact. Perhaps it’s a case of “watch this space” closer to election time….

Hope that helps breakdown the current fuss over The Henry Tax Review.

Talk soon,

C

PS. If you're interested in reading more, I found this update by Colonial First State to be fairly readable. http://www.colonialfirststate.com.au/prospects/henrybriefing2.pdf

No Financial Planning Commissions – So what does that mean for you?

... a "burbs breakdown"

The abolition of financial planning commissions has attracted a lot of media attention over the past week and a half, and I’ve had a number of people ask me what it all means. Well you can have a read through the 14 page “The Future of Financial Advice” information pack issued by Chris Bowen (Minister for Human Services, Minister for Financial Services, Superannuation and Corporate Law), or you can just read my blog for a simple "burbs breakdown"!

Ok, back when I first started in the industry 16 years ago, most Financial Planners were remunerated by commission. A very common scenario would be as follows:

1. Client seeks advice from a Financial Planner;

2. Financial Planner does all the research, calculations, evaluations etc, and prepares a written recommendation;

3. Client accepts recommendations and the Financial Planner receives say 5% commission from any amount invested.

No argument, it was pretty good money, BUT, if the client ultimately decided not to proceed with the recommendations, the Financial Planner had spent many hours working on something he/she would never be paid for. So I guess there had to be a higher fee for the risk that was taken.

These days many Financial Planners (including me) charge on a “fee for service basis”. This means that we simply charge a set fee for any work we do, and then rebate any commissions back to the client. Sooooo, the decision to ban all commission as of 1 July 2012 probably won’t make a significant difference to many investors.

Financial Planners that apply fees for any services provided, but offer investors the option of paying by invoice or having the equivalent amount debited from their investment or superannuation account. In our experience, the overwhelming majority of our clients do choose to have their fees paid as brokerage from their investments rather than their cashflow.

This option of giving investors the choice of how they pay a set fee will continue, with one exception. Any fees relating to gearing will need to be paid directly by invoice. Seeing that gearing involves borrowing, it should be relatively simple to factor payment into the process.

I don’t imagine most Financial Planners mind how they are paid, and I certainly believe it should be the choice of the investor.

So exactly how will it affect you?

When the changes come into effect in 2012, I believe the following issues will have the main impact:

- It will be less confusing and more transparent for investors, because Financial Planners will be required by law to express their fees in dollar terms. This means that even when fees are calculated as a percentage of the client’s funds under management, Financial Planners must still include the actual dollar amount it represents.

- In circumstances where Fund Managers may have previously paid financial planning fees (or part of the fees) from their own pocket, these may need to be paid by the investor going forward.

- It will eliminate any potential for Fund Managers to influence Financial Planners by offering higher levels of commission for their investment products compared to similar products. This will be particularly helpful where the Financial Planner is aligned to a large financial institution offering its own products.

What about insurance?

At this stage, commissions will continue to be permitted for insurance services. The reason for this is because there is a very real concern that Australians would not be able to afford to pay the fees associated with this type of service. Furthermore, even if they could afford it, they might be reluctant to allocated their personal financial resources to the setting up of insurance. The government certainly doesn’t want to be responsible for further exacerbating Australia’s already disturbing under-insurance statistics.

Summary:

Quite simply, the changes are largely positive but probably won’t have a huge impact on most investors. There is a chance that some financial planning services might be more expensive as a result of managers no longer being able to contribute to the payment of fees, but this is possibly a small price to pay for the peace of mind received. Personally, I don’t know any advisers where this would be their reason for selecting an investment product, but taking it out of the equation completely just makes sense.

Hope that helps explain all the fuss about commissions at the moment.

 

Talk soon,

C

 

PS. If you would like to read the information pack, see the link below! http://ministers.treasury.gov.au/Ministers/ceba/Content/pressreleases/2010/attachments/036/Future_of_Financial_Advice_Information_Pack.pdf

A Tale of Two Cultures

I’ve lived in the suburbs and I’ve lived in the city, and the greatest difference I noticed was the two very distinct cultures. For this reason, I can understand why most people feel strongly about one lifestyle over the other.

Personally, I do enjoy both, but I’ve ultimately chosen to settle in suburbia because I believe it suits my personality best.

I’m unashamedly parochial – I like eating at local restaurants, buying local produce, and shopping locally. I positively love the fact that it only takes me 10 minutes and one set of traffic lights to get to work, that I can always find (free) parking, and that I can get a great haircut and colour for $95.

I’ve deliberately foregone proximity to the CBD in favour of a ¼ acre block and a pool in my backyard. Not to mention the smell of barbecues and freshly mowed grass in Summer.

Melbourne is a terrific city, and some of my favourites places to travel include cities like Bangkok, LA, Hanoi, and Singapore City; proving that you can take the proverbial girl out of the burbs, but you can’t take the burbs out of the proverbial girl!

So what does all that have to do with money? Well, again, I guess this comes back to the culture differences. Money and success are typically associated with a city culture, often to the neglect of my lovely suburbia.

Even though we have so much information available to us these days about finance, there’s surprisingly little that specifically tackles “money matters in the burbs”.

That’s where I come in… I’ve been a Financial Planner for over 16 years and I’ve lived in the outer-eastern suburbs of Melbourne most of my life. So I feel I’m pretty well equipped to help you navigate the world of money as it apples to suburbanites.

Over time, I’ll endeavour to cover all the issues that matter to us out in the burbs – the sharemarket, property, superannuation, budgeting, borrowing, paying off the mortgage, managed funds, savings plans, paying for private school education, tax, credit cards, fashion, travel and household spending, Wills, Powers of Attorney, life insurances, gearing, cashflow, Self Managed Superannuation, Small Business and so much more.

I’ll also try and help put financial events into perspective as they occur. Rather than wading through all the various media reports, and trying to understand the jargon, you’ll be able to read my blog for an easy to understand explanation of what’s going on and how it affects you.

Most importantly, everything you read will be easy to understand and hopefully a lot of fun. So let’s get started!!

C